Stocks in the coming week will navigate the uncertainties of Japan's nuclear crisis and the potential risk of heightened military action in Libya.
"The number one risk that could derail the global economy right now is a spike in oil prices...we've been very clear on saying you can't predict, we don't know what's going to happen in the Middle East. The current vibes are supportive of a relatively sanguine outlook in the next year, but you just don't' know. We continue to go overweight gold against several of these risks."
Global market forces will also be at work as investors watch foreign exchange trading, after the Group of Seven countries jointly worked to drive down the rapidly rising yen Friday. Stocks will continue to be vulnerable to any sharp moves in energy markets, should Middle East developments send oil barreling higher.
Stocks in the past week saw heavy selling, but ended the week with two up days. The Dow lost 1.5 percent to 11,858, while the S&P 500 fell 1.9 percent to 1279. The Nasdaq suffered the most, down 2.7 percent to 2643. The S&P by Wednesday was down 6.4 percent from its Feb. 18 multi-year high of 1343.
"It's quite amazing it's not been a full 10 percent correction, after a 25 percent move up. Given the somewhat dramatic nature of what was going on in the Middle East and Japan, given all these things, the market is acting very well," said Stuart Freeman, chief equity strategist at Wells Fargo Advisors.
"We came into this year saying 1250 to 1300 is a base case of where we could be at the end of the year...and if all the planets align and there's no glitches we could be at 1400 at the end of the year...assuming things go well from here. So far things haven't gone so well," said Freeman.
There are several new pieces of housing data in the coming week, durable goods and consumer sentiment. Fed Chairman Ben Bernanke speaks at a banking conference Wednesday, and there are several other Fed speakers on the calendar. But the main focuses are the Middle East and the crisis in Japan, where a devastating 9.0 earth quake and tsunami a week ago destroyed communities and disrupted the economy. The big question hanging over Japan is whether progress can be made in controlling the damaged nuclear reactors at the Fukushima Daiichi nuclear plant and whether any major population centers are at risk from radiation contamination.
The extent of the potential problems with the Fukushima reactors was still unclear, but investors appeared to have moved beyond fears of the worst case scenario by Friday. Northern Trust chief investment strategist Jim McDonald said that a major issue was a lack of reliable and timely information but after studying the situation he believes the risks from Japan are not likely to derail the global economic expansion.
Supply chain disruptions are expected and the impact so far on companies is unclear, but the direct impact on U.S. economic growth from the earthquake and its aftermath should be minor, he noted. Japan consumes just 4.7 percent of U.S. exports, and represents just 0.4 percent of U.S. GDP.
"We got our utilities analyst here and we said to him: 'You're our guy. You read everything and you tell us what the heck is going on. He was the one to come to us and say, 'hey it's not as bad as it's being made out to be. There is risk certainly but it's not something that's going to lead to mass illness around the world," said McDonald. Like many in the markets, they concluded that the situation is not likely to be as hazardous as the Chernobyl nuclear disaster.
Investors will be watching companies to see what they say about the impact of the Japanese earthquake on their supplies or business. Tiffany reports earnings Monday morning, and it generates about 20 percent of its sales in Japan. The company has had to shut down some of its 55 Japan stores. Research in Motion , Oracle and Best Buy report earnings Thursday, and they also may comment on any Japan-related impact.
Oil and Dollar: Where Are We Going?
"The number one risk that could derail the global economy right now is a spike in oil prices," said McDonald. "...we've been very clear on saying you can't predict, we don't know what's going to happen in the Middle East. The current vibes are supportive of a relatively sanguine outlook in the next year, but you just don't' know. We continue to go overweight gold against several of these risks."
Freeman also said rising gasoline prices are clearly a risk to consumer confidence. "That continues to be a question mark. I think if oil prices stay in this area or a little higher, and gasoline doesn't go too much over $4...we'll work through this. Right now, it's being taken as a negative on the part of the consumer," he said.
Crude finished the week virtually flat at $101.07 but it was a week that saw plenty of volatile swings, as traders reacted to every headline out of the Middle East.
"Traders bid it up yesterday (Thursday) on fears that the U.S. and its allies were going to get involved in another conflict in the Middle East" after the U.N. announced a no-fly zone over Libya, said Addison Armstrong of Tradition Energy. Oil gave up some of its gains Friday after Libya declared a cease fire.
"Without the tension in the Middle East, we'd be trading in the mid $80s," he said. "I think one thing you have to watch out for is more stepped up attacks by militants in Nigeria because we're going into the important time of year for gasoline. The Japanese situation is going to keep a bid in the refined products markets because they've lost a third of their refined products market. That's going to keep heating oil high even though we don't have heating oil demand anymore. It's a proxy for hedging diesel and jet fuel."
The dollar was the loser in foreign exchange markets, down 1.4 percent for the week against the yen, even after Friday's 2.4 percent gain from intervention by major central banks. Dollar yen broke a new low below 77 in the past week, and finished Friday at 80.7559.
"I think there's two big stories—the yen and the euro. I think the intervention already met its point of diminishing returns. We intervened in the U.S. session, and dollar/yen did not make new highs," said Marc Chandler, chief currency strategist at Brown Brothers Harriman.
The dollar also lost 1.9 percent against the euro, which was at 1.4168 Friday. "I would think the euro would go higher, maybe challenging November highs of 1.4282. That's where it looks like it's headed" next week, Chandler said.
European Central Bank President Jean Claude Trichet speaks Monday before a European Parliament committee and he has been talking up an interest rate hike, which has been supporting the euro. On Friday, he said he had no new message on rates, despite the recent crisis in Japan so traders concluded a rate hike is still possible in April.
Morgan Stanley, meanwhile, sees U.S. rates rising. Jim Caron, global head of interest rates strategy said the firm is reducing its exposure to bonds because even with the disaster in Japan and unrest in the Middle East, their expectations for higher growth and inflation are unchanged.
Caron said he is negative on bonds because the yields have fallen so much in the past few weeks that it's on the tipping point of pricing in a decline in growth and inflation expectations. But if and when anxieties ease over Japan and the Middle East, the bond market could see a sharp reversal to higher yields.
"If things aren't' getting worse in Japan, by definition they are getting better. From the news headlines, it looks like they are making slow progress. Then a lot of the flight to quality is going to come out of the Treasury market. If that happens, I would argue yields could go up...it takes continuing disaster for yields to go down," said Caron. Caron said he retains his forecast for a 4 percent 10-year yield this year. The 10-year was yielding 3.28 percent Friday.
Investors will be watching Bernanke and the other Fed speakers this week for any comments on the Fed's quantitative easing program. There was immediate market speculation this week that if the Japan situation hurt the economy that the Fed would consider another round of quantitative easing, or the program under which it is purchasing $600 billion in Treasury securities. That program expires in June.
"We do have a lot of Fed speakers so they're likely to opine on the prospect for additional quantitative easing...Bernanke might mention the prospect of renewing swap lines with the Bank of Japan," said Brian Dolan of Forex.com.
President Obama will spend four days in Latin America, visiting Brazil, Chile and El Salvador. Obama meets Brazil's new president Dilma Rousseff Saturday. Treasury Secretary Geithner travels with the president to Brazil.
Cleveland Fed President Sandra Pianalto speaks Monday on the economy. Minneapolis Fed President Narayana Kocherlakota, Altanta Fed President Denis Lockhart and Philadelphia Fed President Charles Plosser speak on Friday.
Housing data is released Monday, when existing home sales are reported, and new home sales are Wednesday. On Tuesday, the FHFA home price index is released. Weekly jobless claims and durable goods are reported Thursday, and revised fourth quarter GDP and consumer sentiment are released Friday.
Besides Tiffany, companies reporting earnings include Carnival, Walgreen's, Adobe Systems, Discover Financial and Jabil Circuit on Tuesday. General Mills, Paychex, and Red Hat report Wednesday. On Thursday, ConAgra and Game Stop release results.
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